How Price Waterfalls are used in Revenue Control to establish the actual revenue and KPIs to control.
Revenue Control: Improve Profits in Complex Businesses
Learn how to use revenue control to improve profitability in B2B
This is the first article in a series about Revenue Control.
Revenue in B2B is defined as Quantity multiplied by (Price minus on-invoice discounts minus off-invoice rebates). Historically, Revenue Management has been associated with industries such as airlines and hotels, but in reality all B2B companies can benefit tremendously from revenue management and optimization. Especially those companies who have complex businesses with many products, discount types or considerable off-invoice amounts granted to customers.
In comes Revenue Control: by applying a set of analytics combined with approval workflows you can achieve revenue improvements across deals, customers and products. The basic steps involve:
- Establish a price waterfall from list price, over discounts, net price, rebates to net net price, or pocket price.
- Share the waterfall for each customer with the sales team who makes the negotiations and revenue decisions
- Create one or more KPIs to follow, such as Net Net Price and perhaps Net Net Price in % of List Price.
- Establish rules about the KPIs such as a minimum Net Net Price (often called a Floor Price) per segment, channel or country. Communicate these rules internally.
- Create approval steps for what kind of price changes the sales team can implement, and make deviations from the Floor Price increasingly difficult to have approved, the larger they get. E.g. add several approval steps from more senior people if the deviation is signicant.
- Make it a continuous process, probably implemented by software, in order to make it repeatable (and unavoidable - no point in a process if it can be circumvented)
By establishing this as a repeated process companies will improve revenue on the individual transaction, customer, or channel. And even if not all net net prices get increased, the bad deals get eliminated over 6-12 months, or at least highlighted to the entire organisation instead of being additional discounts or rebates swept under the rug.
In the coming series of articles about Revenue Control we will look into more detail about how to do these things in practice, as well as avoiding pitfalls and potential issues.